Oil Industry Withdraws From High Cost Areas

The oil industry is pulling back from some marginal areas of operation, slashing jobs and spending, and retrenching in the face of the ongoing slump in oil markets.

Signs of a shrinking footprint are beginning to pop up across the globe. Norway’s Statoil has let three of its exploration licenses expire in Greenland, an acknowledgement that exploring in frontier lands no longer makes sense with oil at $50 per barrel. Not too long ago, Greenland was hyped as an unexplored and pristine new oil region. The excitement was enough to fuel a bit of an independence movement within Greenland to pull away from Denmark.

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However, drilling in Greenland would be highly technical, expensive, and would present geological and environmental risk. Statoil has decided to shelve its plans for now.

Statoil also put an end to negotiations with Lundin Petroleum over building an oil terminal in Norway’s far north. Building an Arctic terminal would aid the development of several offshore oil and gas fields in the Barents Sea, where the companies each have made several discoveries.

Royal Dutch Shell will also face a critical decision over whether or not to return to the U.S. Arctic in 2015. It has already asked U.S. regulators to extend its licenses beyond their expiration dates in 2017, after having fumbled through several years of mishaps and false starts. With some of the most expensive and dangerous oil on the planet, Shell’s Arctic campaign is on life support and will be iced for good if oil prices do not recover. Oil companies looking to go north of the Arctic Circle are facing stiff headwinds across the world.

Elsewhere, there are signs of a major contraction. Tullow Oil, a British oil company that drills in West Africa, has taken a $2.7 billion write-off. It is dialing back its drilling plans significantly, slashing exploration spending down to $200 million, about one-fifth of what it was just a year ago. For their part, the economies of African oil-producing countries are suffering under low prices.

And in the U.K. the oil industry is facing an existential crisis. BP announced on January 15 that it would lay off 300 workers there. That follows last month’s announcement by ConocoPhillips that it planned on laying off 230 of its workers. After BP’s announcement, Energy Secretary Ed Davey flew to Aberdeen and said that the British government was “determined to do everything we can” to stem the job losses. But many of the oil fields in the North Sea are maturing and highly expensive. As long as oil prices remain low, much of the reserves could become stranded assets.

On January 14, Shell cancelled its plans with Qatar Petroleum to build a $6.5 billion petrochemical plant, which Bloomberg calls “one of the biggest casualties of slumping oil prices so far.” That is the second major facility to be scrapped in Qatar – in September a state-owned Qatari firm cancelled plans to build a different $6 billion petrochemical facility.

The slump in oil prices may even delay the welcoming party for Mexico. The Mexican Finance Secretary suggested on January 15 that bidding for shale deposits may be pushed off for now due to low oil prices. He also said that slumping revenues may force the federal government to cut public spending once hedges expire, likely in 2016. Mexico is thought to be another area of untapped potential for the oil industry as much of its ultra-deepwater and shale reserves have been unexplored by state-owned Pemex.

In the United States, too, a pullback is underway. The number of drilling rigs in North Dakota has dropped to its lowest level since 2010. A wave of job cuts is beginning – an estimated 140,000 jobs could be cut in Texas alone this year.

The pullback for the oil industry is necessary in order to rebalance supply and demand. Drillers had become overextended and they are now collectively producing more oil than the world needs. Now, cutbacks are in order.

Still there is a lag effect – with a backlog of shale wells still awaiting completion, U.S. oil production will not drop off immediately.

However, the first evidence of a slowdown in production is becoming visible. The International Energy Agency revised downwards its forecast for non-OPEC production this year. In a new report, the IEA says that non-OPEC countries will produce 350,000 barrels per day less than the agency previously thought. That may not be enough to balance the market just yet, but it is evidence that low oil prices will force some production out of the market in the coming months.